1. German Businesses Continue to See Improvement Ahead

German Ifo Business Climate climbs to 109.6 from 108.3, beating forecasts of a gain to 108.7.

We previewed this release and its impact for Euro-zone and the EUR/USD here: EUR/USD – Trading the German IFO Business Climate Index.

It’s a key leading indicator and the report is a positive as it implies the largest economy in Europe remains resilient, and the prospects for the economy continue to improve.

From ZEW: “More companies reported a favourable business situation than in January. They expressed greater optimism about their business expectations for the fourth time in succession. The German economy is currently supported by domestic demand.

  • The business climate continued to brighten slightly in manufacturing.
  • The business climate brightened clearly in retailing and wholesaling.
  • The business climate indicator rose significantly in construction.”

The news helped push the EUR/USD pair above 1.33, reaching a high of 1.3340, but since then has fallen back to 1.3290, as positive sentiment regarding Germany is met with concern about the rest of the Euro-Zone.

2. While Germany Shrugs Off Crisis, Italy and Spain Set to Contract in 2012

While its good that Germany’s economy continues to shrug off the impact of the sovereign debt crisis to begin 2012, the same can’t be said for Italy and Spain. The European Commission in a report today said both economies would contract in 2012, and with them the wider Euro-zone. The divergence between the “core” and the “periphery” – a major theme in the early part of 2011 – is back.

While the EC lowered growth projections, they did at the same time increase expectations for inflation. That would imply less scope for the ECB to help stimulate the economy via interest rate cuts.

From Bloomberg: “Europe’s economy will shrink in 2012, with Italy and Spain facing sudden crunches as they battle to escape the debt crisis, the European Commission said.

The 17-nation euro economy will contract 0.3 percent, the commission said, abandoning a November forecast of 0.5 percent growth. The downgrade was mainly due to projected contractions of 1.3 percent in Italy and 1 percent in Spain.

The growth downgrade went along with a higher inflation forecast, potentially limiting the European Central Bank’s scope for a further cut in its main interest rate from 1 percent. Euro-area inflation will reach 2.1 percent, topping the central bank’s 2 percent limit, the commission said. In November it had counted on 1.7 percent inflation.”

 

3. Record High Oil Price in UK Send off Alarms

A major headwind for the UK and Europe are surging oil costs which have climbed above the highs set last year in the wake of the war in Libya. With the UK set to be mired in uneven growth ahead, and with Europe undertaking austerity measures, the prospect of higher energy costs dampen the prospect for economic activity.

From FT: “Oil prices have soared to a record high in sterling terms and are approaching euro highs, raising fears that European countries struggling with heavy debts will face further barriers to economic recovery.

Brent rallied to £78.48 a barrel, passing the previous all-time high of £77.71 a barrel set in April last year at the peak of the Libyan civil war supply disruption. In euro terms, the oil benchmark reached a three-year high of €92.70 a barrel, a fraction below the peak of €93.50 a barrel set in July 2008.

Economists said the rise in oil prices would eat into corporate profitability as well as the ability of consumers to spend. It would also put upward pressure on inflation, and limit the scope for further monetary easing.”

Here is a look at Brent crude in USD terms, which is approaching its highs set last year near $126.80.

 

 

We will be discussing the impact of this release on euro crosses in our upcoming life market intelligence briefing, Thursday 8:00 AM ET (13:00GMT). To gain free access to FXTimes live market intelligence briefings register here at IBTrade.

Nick Nasad is an analyst, educator, and trader; and one of the main contributors to  FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

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